Thursday, 31 May 2012

Spanish Banking (2)

Yesterday I
pointed out that, due to the financial crisis that started in the USA in 2008,
banks in Northern European countries had to be bailed out by their governments,
as happened for instance in Iceland, the Netherlands and Belgium.

Why then, we may
ask, were Spanish banks apparently untouched? Why could the bungling PM of the
day declare for all to hear that the Spanish banking system was the strongest
in the world and would never need help? Why did the excrement only hit the
Spanish airco system four years later?

Well, if you happen
to have the answer, I will gladly listen to it. All I can do myself is give you
the impression I got from listening to a million different forecasts and
explanations in the course of the last few years. As I understand it, Spanish
banks were playing in a different league and in another stadium than their
Northern colleagues. Apparently the part of their reserves invested in the USA
was rather negligible. Most of it was invested either in Latin America, which
after the Argentinian slump began to grow again round about 2000, and in Spain
itself. But there, in Spain, they were deeply, VERY deeply into the mud of the
housing market.

This should have
hit them as soon as the housing bubble burst in 2008. Except that, due to
Spanish bookkeeping laws, Spanish banks did not yet need to show their losses on
their balance sheets until 4 years later, i.e. today. During those four years
they could maintain the fiction that the sellable and unsellable properties
they held were still worth the money for which they had been acquired before
the bubble burst. On paper, at the bottom line, they were still rich and healthy, since an
abandoned suburban mansion, standing half-finished on the outskirts of Madrid
and now gutted by gangs of copper-robbers and fixture-thieves, was still on the
books for its estimated sales-price of 400,000 euros, instead of the
depreciated ‘true’ value of perhaps 100,000.

This ticking
time bomb was not, of course helped at all by many of those home-owners with
mortgages far beyond their means losing their jobs and failing on their
payments. It was not helped along either by a more than absurd volume of
construction for speculative reasons, without an eye to possible future demand.
To give you but one telling number which I remember: it seems Spain has 25
million housing units. And it has some 46 million inhabitants. This means less
than 2 inhabitants per house, in a country where families are large and often
live together. To call this an imbalance is a masterpiece of euphemism.

Naturally,
everybody who understood anything at all of banking knew what was coming. And
so some measures were taken, in the vain hope that one might convince a
hurricane to turn away from the coast. The now infamous Bankia is the result of
that. It is, in fact, a very young financial behemoth, put together two or
three years ago by the obligatory merger of several so-called ‘Cajas’,
provincial saving banks. If I understand it well, these suffered from two horrid
weaknesses. The first was that legally they were not exactly banks, and were
therefore not equally – or sufficiently - restricted in the number and volume of
mortgages they dealt out. The second was that they were the plaything of local
politicians. CEO’s, appointed by the dominant political parties in the
province, were given the task to create jobs, growth, prestige projects and
fell-good experiences, which might translate into votes for the party.
(Northerners may wince at this notion, but it is an integral part of the
traditional client system of the Latin south, the Middle East and Africa
whether we like it or not, and it works in a way).

This political
dimension tossed one more venomous ingredient into the brew: political
protection, read: impunity for the executives. Since a great many of the
political leaders (from both main national parties and several of the great
provincial parties) were at least partly responsible for the mess, and since it
is likewise part of the client system not to crack down on those who are loyal
to you, the bankers involved were not immediately called to account, but were
expected to cover up the damages as well as they could, until an easy way out
might be found, or the mess might be blamed on the other political party. This
is one more aspect which postponed the arrival of the hour of truth.

Thus not only
did the Spanish rules of bookkeeping mask the problem for a number of
years, but it turns out that the bigger banks have been lying through their
teeth to cover up the true size of the problem. Bankia – which is merely the 4th
financial entity of the country – last February still pretended to have made a
300 million profit over 2011. It now turns out there is a 3 billion loss! And
as the scandal grows, the estimate of the sum it will take to keep the behemoth
afloat is doubling every week. It was 4 billion two weeks ago, then turned into
8 or 9 one week ago, today it stands at 19 billion Euros, even though the sum
of 24 billion has already been whispered! (The entire hole in the balance sheet
seems to 40 billion).

In fact, the
thing is simply bankrupt. But once again, like Freddy and Fannie, like ABN
Amro, Fortis and… well, you name them: it is too big to fail. And so a solution must be found. Since this post
is already long enough itself, I’ll dedicate next Saturday’s post to that dire
question (tomorrow being Cookbook Friday).

Meanwhile I
would earnestly welcome comments from those whose understanding of this tangle
is better than my own! Alfred B. Mittington, aged and brilliant as he may be,
is still young at heart and very much willing to learn!

[PS In roughly
the middle of his blog, Colin Davies today (May 30) has a piece of news on a
possible Eurobond Light which seems to be in the making so as to finance Southern
debt at reasonable cost, while preserving national say and sovereignty in the North.
Let’s see how that works out.]